[Federal Register Volume 64, Number 78 (Friday, April 23, 1999)]
[Rules and Regulations]
[Pages 19906-19910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10146]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AI92


Loan Guaranty: Requirements for Interest Rate Reduction 
Refinancing Loans

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: This document amends our loan guaranty regulations concerning 
the requirements for Interest Rate Reduction Refinancing Loans 
(IRRRLs). Under the final rule, generally to obtain an IRRRL the 
veteran's monthly mortgage payment must decrease. Also, the final rule 
provides that the loan being refinanced must not be delinquent or the 
veteran seeking the loan must meet certain credit standard provisions. 
We believe these changes are necessary to ensure that IRRRLs provide a 
real benefit to veterans and protect the financial interest of the 
Government.

DATES: Effective Date: May 24, 1999.

FOR FURTHER INFORMATION CONTACT: R.D. Finneran, Supervisory Loan 
Specialist (264), Loan Guaranty Service, Veterans Benefits 
Administration, Department of Veterans Affairs, 810 Vermont Avenue, 
NW., Washington, DC 20420, (202) 273-7369.

SUPPLEMENTARY INFORMATION: Under the authority of 38 U.S.C. chapter 37, 
VA guarantees loans made by lenders to eligible veterans to purchase, 
construct, improve, or refinance their homes (the term veteran as used 
in this document includes any individual defined as a veteran under 38 
U.S.C. 101 and 3701 for the purpose of housing loans). This document 
amends VA's loan guaranty regulations by revising the requirements for 
VA-guaranteed IRRRLs.
    The IRRRL program was established by Public Law 96-385, October 7, 
1980. IRRRLs are designed to assist veterans by allowing them to 
refinance an outstanding VA-guaranteed loan with a new loan at a lower 
rate. The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow 
the veteran to do so without having to pay any out-of-pocket expenses. 
The veteran may include in the new loan the outstanding balance of the 
old loan plus reasonable closing costs, including up to two discount 
points.
    In a document published in the Federal Register on June 3, 1998 (63 
FR 30162), we proposed to amend the loan guaranty regulations 
concerning the requirements for IRRRLs. Under the proposal, generally 
to obtain an IRRRL the veteran's monthly mortgage payment must 
decrease. Also, if the loan being refinanced is delinquent the lender 
must submit the proposed IRRRL to VA for prior approval of the 
veteran's creditworthiness. With respect to the proposal, we provided a 
60-day comment period, which ended August 3, 1998. In the proposal, we 
also stated that we would consider comments submitted in response to a 
rescinded interim rule (62 FR 52503, 63454) which addressed the same 
issues that were addressed in the proposal. We received many thousands 
of comments, most of which were groups of identical responses in form 
letters. The issues raised in the comments are discussed below.
    Based on the rationale set forth in the proposed rule and in this 
document, we are adopting the provisions of the proposed rule as a 
final rule without change except for nonsubstantive changes for 
purposes of clarity.

Monthly Payment Reduction

    The final rule generally requires that the monthly payment 
(principal and interest) on the new loan be lower than the monthly 
payment on the loan being refinanced. A number of commenters supported 
this change. Some commenters stated that they generally opposed any 
changes regarding IRRRLs and one commenter raised specific objections 
regarding the issue of monthly payment reduction. This commenter 
submitted an alternative to the proposal which would allow 10 percent 
of a lender's volume of IRRRLs closed during any calendar month to 
exceed the previous monthly payment on the loan being financed while 
not simultaneously reducing the term of the loan, and provide for 
sanctions if the 10 percent threshold were exceeded.
    We believe that with the four exceptions discussed below, there is 
no legitimate reason for allowing the monthly payment (principal and 
interest) on the new loan to be as high or higher than the monthly 
payment on the loan being refinanced. The final rule is intended to 
prevent the veteran's monthly payment from increasing because of 
extensive costs added to the loan (including closing costs), even 
though the interest rate is lowered slightly. This is consistent with 
the Congressional intent of the IRRRL program as expressed in the House 
Report (H. Rep. No. 96-1165, July 21, 1980, at p. 3) which states: 
``[T]he bill is * * * intended to assist veterans by allowing their 
monthly payments to be reduced. * * * ''
    The final rule also provides that the monthly payment reduction 
requirement would not apply to four limited situations where VA 
believes that other factors offset the risk of loss from an increase in 
monthly payment. These four situations are cases in which an adjustable 
rate mortgage (ARM) is being refinanced with a fixed-rate loan; cases 
in which the term of the new loan is shorter than the term of the loan 
being refinanced; cases in which the increase in monthly payment is 
attributable to the inclusion of energy efficient improvements, as 
provided in Sec. 36.4336(a)(4); and cases in which the Secretary 
approves the new loan, on a case-by-case basis, in order to prevent an 
imminent foreclosure. We reaffirm the following rationale which was 
stated in the proposal (63 FR 30163) for establishing these four 
exceptions:
    ``With regard to ARMs, there is already a possibility that the 
monthly payment will increase in future years.

[[Page 19907]]

The certainty that the payment on the new loan will not increase in 
future years offsets the increased risk associated with the immediate 
increase over the veteran's current payment. VA may establish limits on 
the amount of such increase in future rulemaking. Although the monthly 
payments on shorter term loans are higher, they amortize faster, thus 
reducing the risk of loss to both the veteran and the Government. In 
future rulemaking, VA may address minimum term reduction. Current law 
allows veterans to include additional costs of energy efficient 
improvements in IRRRLs; thus, this exception would merely continue 
current law. Finally, with regard to imminent foreclosure, the risk of 
loss to the Government and veteran from such foreclosure could be 
greater than permitting a new loan at a higher monthly payment. VA 
would have to approve each such loan on a case-by-case basis under 
existing credit underwriting standards set forth at 38 CFR 36.4337 to 
ensure that it is in the best interest of the Government and that the 
veteran is able to afford the new payment.''
    Accordingly, we are not adopting the proposed alternative suggested 
by the commenter. For the reasons set forth above, VA does not believe 
any IRRRL where the monthly payment will exceed the payments on the 
loan being refinanced should be permitted unless it falls within the 
standards discussed above. Further, VA does not believe a lender should 
be limited to an arbitrary 10 percent threshold for IRRRLs having an 
increased monthly payment if the payment increase on each individual 
loan is permitted under these standards.

Delinquent Loans--General Comments

    Prior to the effective date of this document, VA administratively 
required prior approval review for an IRRRL in accordance with 38 CFR 
36.4303(c) if a scheduled monthly mortgage payment of the loan being 
refinanced were more than 90 days past due. The final rule states that 
a loan being refinanced is considered delinquent and an IRRRL replacing 
such loan is subject to such prior approval procedures if a scheduled 
monthly mortgage payment of the loan being refinanced is more than 30 
days past due.
    Almost all commenters asserted that VA should continue to require 
prior approval review for an IRRRL only if a scheduled monthly mortgage 
payment of the loan being refinanced were more than 90 days past due. 
We respectfully disagree with the commenters.
    This final rule makes changes needed to prevent lenders from 
encouraging veterans to default on their current loans, and then to 
refinance the delinquent loans with IRRRLs that include missed 
payments, fees, and late charges.
    VA has become aware of a number of lenders who encourage veterans 
to skip two or three mortgage payments and then obtain an IRRRL which 
includes the missed payments, fees, and late charges. We believe the 
provisions of the final rule are necessary to meet the intended 
requirements of Public Law 96-385 which established the IRRRL program. 
In this regard, the legislative history of Public Law 96-385 states 
that ``a veteran would not be permitted under the bill to obtain cash 
from the proceeds of the refinancing loan for other purposes.'' H.R. 
Report 96-1165, 96th Congress 2d. Session (1980) at 3.
    VA is aware that it is common for persons who refinance home loans 
to skip the payment due on the first day of the month in which their 
new loan will close. For example, if a lender expects to close an IRRRL 
on or about October 18, the lender may tell the veteran that he or she 
may skip the payment due October 1. The skipped payment is then 
included in the principal balance of the IRRRL. The changes made by 
this final rule would not affect this common practice. Under the final 
rule, only ``delinquent'' loans are subject to the prior approval 
procedures. Since the final rule, consistent with industry practice, 
defines ``delinquent'' as being more than 30 days past due, the loan in 
this example is not delinquent and would be eligible for streamlined 
processing, i.e., processing without regard to VA prior approval 
procedures.
    As noted above, the final rule states that a loan being refinanced 
is delinquent and an IRRRL replacing such loan is subject to prior 
approval procedures if a scheduled monthly mortgage payment of the loan 
being refinanced is more than 30 days past due. Not only is the final 
rule needed to prevent lenders from causing veterans to default on 
their current loans, it is needed to prevent lenders from closing poor-
quality IRRRLs.
    Commenters disagreed with the conclusion that action was necessary 
because of poor quality IRRRLs. They asserted that when VA guaranteed 
the original loan for a veteran, VA assumed a certain risk and that a 
subsequent IRRRL does not increase the Government's risk. Commenters 
further asserted that the risk of default on an IRRRL is reduced 
because the interest rate is lowered. With respect to loans that are 
current, VA presumes that the veteran, having established 
creditworthiness for the original loan, continues to be creditworthy 
for an IRRRL. VA notes, however, that loans more than 30 days past due 
reflect that two payments were missed. This raises the question as to 
whether an underlying financial problem exists that requires attention. 
An IRRRL which capitalizes missed payments, fees, and late charges 
would have a higher loan-to-value ratio than the loan being refinanced. 
Thus, the IRRRL, at least initially, would be less secure than the 
original loan. If an IRRRL is foreclosed shortly after being made, the 
loss to the taxpayers likely would be greater than would have been the 
case had the original loan been foreclosed. Sometimes a lower interest 
rate on an IRRRL would reduce the monthly payment sufficiently to allow 
a veteran in financial distress to make the payments. This is not 
always true. In fact, in many cases a veteran's degree of financial 
distress would prevent the veteran from making even the reduced monthly 
payment on the IRRRL. Accordingly, prior approval procedures are 
necessary to ensure that the veteran who is delinquent can meet the 
payment terms of the IRRRL.
    As noted above, the final rule states that prior approval 
procedures must be met for an IRRRL if a scheduled monthly mortgage 
payment of the loan being refinanced is more than 30 days past due. 
Commenters recommended that, as a compromise, the 30 day time period be 
changed to 59 or 60 days. One commenter submitted an alternative to the 
proposal which would allow an unlimited number of a lender's volume of 
IRRRLs closed during any calendar month to be up to 60 days past due 
and to allow 10 percent of a lender's volume of IRRRLs closed during 
any calendar month to be between 60 and 90 days past due, and provide 
for sanctions if the 10 percent threshold were exceeded. In response, 
we conclude that this would not prevent individuals from skipping 
payments to obtain cash and would not provide adequate protection 
against loans that are in financial difficulty.
    Further, VA disagrees with suggestions from some commenters that 
skipping more than one payment is necessary for lenders to obtain 
accurate pay-off figures from the holder of the loan being refinanced. 
The modern loan servicing industry is highly computerized, and loan 
balances which include the latest payment are obtainable from holders 
within a day or two after their receipt of that payment. Lenders 
normally obtain pay-off figures from holders by fax or overnight 
express. Thus, as an example, there is no practical need for a lender 
which

[[Page 19908]]

anticipates making an IRRRL in mid-October to urge the borrower to skip 
the payment due September 1 in order to obtain accurate payoff 
information.
    Commenters asserted that the final rule could cause some veterans 
to lose their homes due to foreclosure by removing the ability to 
refinance during a period of delinquency. VA agrees that there are 
instances where being able to refinance a loan will make a difference 
between saving a home or losing it to foreclosure. The final rule does 
not automatically preclude such a veteran from obtaining an IRRRL. If 
VA determines that the veteran is creditworthy and able to make the 
payments on the proposed IRRRL and thereby save the home, VA would 
approve the IRRRL. In cases where VA, after carefully considering the 
veteran's entire financial circumstances, concludes the veteran is 
unlikely to be able to make the payments on the IRRRL, the IRRRL would 
not be approved. Such an IRRRL would only delay for a short time an 
inevitable foreclosure, causing greater expense to both the veteran and 
the Government. If a veteran's current loan is delinquent and VA 
determines that the veteran does not qualify for an IRRRL because of 
financial difficulties, VA will use its supplemental servicing 
procedures to determine if other viable alternatives to foreclosure 
exist.

Delinquent Loans--Streamlined Feature

    Commenters asserted that the adoption of the proposed rule would 
take away the ``streamlined'' feature of the IRRRL program contrary to 
the legislative intent. In response, we note that nothing in the 
statutory provisions authorizing the IRRRL program or the relevant 
legislative history requires or even suggests that VA is required to 
implement a streamlined procedure for closing loans. Further, 
streamlined processing would still be available for veterans who are 
not delinquent on their current loans.
    Some commenters asserted that if the proposed rule is adopted, VA 
would be unable to process IRRRLs in a timely manner. In this regard, 
one commenter asserted that the review of prior approvals would 
increase by 35,000 per year. This commenter further asserted that an 
increase would become more burdensome due to a shrinking Federal 
workforce. We do not believe that these results suggested by the 
commenters will occur. We believe that in most cases this final rule 
will cause veterans seeking IRRRLs to make sure that their original 
loans are not delinquent. Further, with respect to those that are 
delinquent, we believe that this will cause lenders to find the 
underlying reason why there is a delinquency and submit to VA for prior 
approval only those applications for IRRRLs that have a reasonable 
opportunity of being approved. Moreover, we note that VA will do all 
that it can to process prior approvals as quickly as possible. In 
support of this effort, VA is consolidating its credit underwriting 
into nine regional loan centers with the intent to provide adequate 
staffing to process all loans in a timely manner. Even so, under the 
provisions of 38 U.S.C. 3710(b)(2) and (b)(3), VA has a statutory duty 
for all loans, including IRRRLs, to ensure that the veteran is 
creditworthy and that the veteran's total income and expenses bear a 
proper relationship to the loan repayment terms. This statutory duty to 
ensure a veteran's creditworthiness must be met even if compliance were 
to cause some delays.
    One commenter asserted that VA is unable to provide statistical 
data or analysis to suggest that there has been an increased rate of 
foreclosure for IRRRLs under the previous policy which provided that an 
IRRRL was subject to prior approval review if the scheduled monthly 
mortgage payment of the loan being refinanced were more than 90 days 
past due. In response, we have compiled the following information from 
our loan guaranty records. Four years ago the early foreclosure rate 
(i.e., within 2 years of loan closing) on IRRRLs was 25% higher than on 
VA guaranteed purchase-money loans. Two years ago the early foreclosure 
rate on IRRRLs grew to 61% higher and has now further grown to 63% 
higher. VA analysis shows that poor origination of some IRRRLs has 
caused this disturbing trend. The final rule is narrowly tailored to 
address this issue and will not significantly impact most IRRRLs.
    One commenter suggested that because VA collects a fee on the 
original VA loan and collects an additional fee on an IRRRL, VA 
collects enough to cover any losses on IRRRLs, and, consequently, the 
final rule is not necessary. In response, we note that the amount of 
fees collected on loans is established by statute (38 U.S.C. 3729). 
There are no statutory provisions that require VA to accept a poor 
credit risk merely because of fees that may have been collected to 
cover amounts paid due to foreclosures. Instead, as noted above, VA 
must ensure that all veterans receiving loans are creditworthy.
    One commenter asserted that regardless of the number of delinquent 
payments, those payments must be allowed to be included in an IRRRL 
because the provisions of 38 U.S.C. 3710(e)(1)(C)(i) state that 
refinanced loans will include the ``sum of the balance.'' In response, 
we note that this must be read together with the provisions of 38 
U.S.C. 3710(b)(2) and (b)(3) which provide that a veteran may obtain a 
guaranteed loan only if creditworthy. Accordingly, under the final rule 
a veteran may obtain a guaranteed loan only if creditworthy, but all of 
those IRRRLs that are closed may include the entire balance of the loan 
being refinanced, including missed payments, fees, and late charges.
    One commenter asserted that the final rule would cause lenders to 
make extensive adjustments regarding computer systems and training. We 
agree that some lenders may have to make some adjustments. However, we 
do not believe that any necessary adjustments will be significant.

Delinquent Loans--Denial of Benefit

    Commenters asserted that veterans who are delinquent on their loan 
payments will be denied the benefit of an IRRRL. This final rule will 
not automatically deny any veteran who is delinquent on an existing VA 
guaranteed loan the opportunity to obtain an IRRRL. In the event that a 
veteran is more than 30 days past due on the loan, the final rule 
requires that VA perform the same creditworthiness review prior to 
approving the IRRRL that is now performed on all other VA housing 
loans. If the veteran is found creditworthy, the IRRRL will be 
guaranteed. If the veteran is found not creditworthy, VA must decline 
to guarantee the loan. However, as noted above, VA will use its 
supplemental servicing procedures to determine if other viable 
alternatives to foreclosure exist.

Delinquent Loans--Out-of-Pocket Expenses

    Some commenters asserted that veterans subject to the prior 
approval procedures would be required to provide out-of-pocket expenses 
at closing and that this ``will mark the beginning of the end'' of the 
IRRRL program by making such loans less appealing to the borrower. The 
vast majority of veterans seeking to obtain IRRRLs will not be in 
default and will be eligible to use the streamlined procedures, with 
only nominal, if any, out-of-pocket expenses. For those subject to the 
prior approval procedures, the cost of a credit report (approximately 
$50) would be the only additional expense the veteran is likely to 
incur. This cost may be included in

[[Page 19909]]

the loan amount. Accordingly, those subject to the prior approval 
procedures may avoid out-of-pocket expenses.

Delinquent Loans--Solicitation to Skip Payments

    Some commenters asserted that instead of the changes made in the 
final rule concerning delinquent loans, VA should establish 
prohibitions against lenders who advertise or otherwise solicit 
veterans to skip payments so that they can include missed payments, 
fees, and late charges in an IRRRL. Some commenters asserted that VA 
should rely on other agencies, including the Federal Trade Commission, 
to enforce such prohibitions. The adoption of these suggestions would 
not address our concerns noted above regarding poor-quality loans. 
Further, in our view, the adoption of these suggestions would not 
provide an adequate system for regulating lenders who advertise or 
otherwise solicit veterans to skip payments. There is no practical way 
for VA or other agencies to monitor and regulate the possible means of 
advertising or other solicitations made by lenders. Because of the 
sheer volume of advertising or other solicitations (e.g., telephone, 
radio, cable TV, direct mail) by thousands of companies, it is not 
practical for VA or other agencies to even be aware of all of them, let 
alone review their content.

Delinquent Loans--Clarification

    In Sec. 36.4306, paragraph (a)(5) provides that if a loan is 
delinquent the new loan will be guaranteed only if the Secretary 
approves it in advance based on a finding that the borrower ``through 
the lender'' has provided certain information and meets certain 
criteria. One commenter asserted that the term ``through the lender'' 
is confusing and should be clarified. In response, we note that 
``through the lender'' merely means that the borrower submits 
information to the lender who in turn submits it to VA. We believe the 
proposed language conveys this concept clearly to readers.

Paperwork Reduction Act

    We submitted the collection of information contained in the notice 
of the proposed rulemaking to the Office of Management and Budget (OMB) 
for review in accordance with the Paperwork Reduction Act (44 U.S.C. 
3507(d)). The information collection subject to this rulemaking, set 
forth at Sec. 36.4306a(a)(3) and (a)(5), concerns requirements for 
certain IRRRLs. The final rule states that a loan being refinanced is 
delinquent and an IRRRL replacing such loan is subject to prior 
approval procedures if a scheduled monthly mortgage payment of the loan 
being refinanced is more than 30 days past due. Under the prior 
approval procedures, lenders must collect certain information about the 
veteran (and spouse or other co-borrower, as applicable), and the 
veteran's credit history to ensure that the veteran is creditworthy. 
Collection of this type of information is normal business practice for 
mortgage lenders.
    We invited interested parties to submit comments on the collection 
of information. However, we received no comments. OMB has approved this 
information collection under control number 2900-0601, which expires 
October 31, 2001.
    VA is not authorized to impose a penalty on persons for failure to 
comply with information collection requirements which do not display a 
current OMB control number, if required.

Executive Order 12866

    This final rule has been reviewed by OMB under Executive Order 
12866.

Final Regulatory Flexibility Analysis

    This final regulatory flexibility analysis is provided to meet the 
requirements of the Regulatory Flexibility Act (5 U.S.C. 601 et. seq.). 
A copy of this final rule, including the final regulatory flexibility 
analysis, is available from the individual referred to in the FOR 
FURTHER INFORMATION CONTACT portion of this document.
    a. A succinct statement of the need for, and objectives of, the 
final rule.
    Response: The need for and the objectives of this final rule are to 
insure that IRRRLs continue to provide a real benefit to veterans and 
to protect the financial interest of the Government.
    b. A summary of the significant issues raised by the public 
comments in response to the initial regulatory flexibility analysis, a 
summary of the assessment of the agency of such issues, and a statement 
of any changes made in the proposed rule as a result of such comments.
    Response: These matters are discussed above in the preamble portion 
of this document.
    c. A description of and an estimate of the number of small entities 
to which the final rule will apply or an explanation of why no such 
estimate is available.
    Response: The final rule would apply to all lenders who make 
IRRRLs. In Fiscal Year 1997, 1476 lenders made at least one IRRRL. We 
believe a number of these lenders are small entities; however, we are 
unable to make an informed estimate of the number because VA does not 
collect information that would establish whether a lender closing 
IRRRLs is a small entity.
    d. A description of the projected reporting, recordkeeping, and 
other compliance requirements of the final rule, including an estimate 
of the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record.
    Response: Any reporting or recordkeeping requirements are discussed 
in the Paperwork Reduction Act portion of this document. The 
requirements of the final rule are discussed above in the preamble 
portion of this document. As noted above, we are unable to make an 
informed estimate of the number of small entities that would be 
affected by the adoption of the final rule. To comply with the 
provisions of the final rule, employees of lenders would not need any 
professional skills that would be additional to those skills already 
needed to process VA home loans.
    e. A description of the steps the agency has taken to minimize the 
significant economic impact on small entities consistent with the 
stated objectives of applicable statutes, including a statement of the 
factual, policy, and legal reasons for selecting the alternative 
adopted in the final rule and why each one of the other significant 
alternatives to the final rule considered by the agency which affect 
the impact on small entities was rejected.
    Response: Generally, limiting IRRRLs to instances where the 
veteran's monthly mortgage payment will decrease and requiring that the 
loans being refinanced either be current in their payments or meet 
certain credit standard provisions is intended to ensure that IRRRLs 
are made only when they provide a real benefit to the veteran and to 
protect the financial interest of the Government. One alternative would 
be to allow IRRRLs to be made only when the veteran's monthly mortgage 
payment would decrease. However, as explained above in the preamble 
portion of this document, this document establishes exceptions in those 
cases when it appears that the objectives could still be met. Another 
alternative would be to require that all IRRRLs meet the credit 
standard provisions. However, we believe this is necessary only when 
the loan is delinquent. Another alternative would be to transfer 
responsibility for policing misleading advertising of offending lenders 
to the Federal Trade Commission. Although VA believes referral of 
generic misleading advertising issues (such as

[[Page 19910]]

bait and switch or truth in lending violations) to FTC is appropriate, 
we do not believe FTC staff would be sufficiently familiar with the 
unique requirements of the IRRRL program to oversee lender compliance. 
We are aware of no alternatives which could be considered that would 
allow the objectives to be met and provide less stringent rules for 
small businesses.
    The adoption of the final rule would not have a significant impact 
on the resources available to small entities. The type of actions that 
would be required are the same or similar to types of actions already 
being handled by employees of small entities.
    We are unaware of any alternatives that would accomplish the 
intended purposes. Further, we are unaware of any changes we could 
consider regarding clarification, consolidation, or simplification that 
could be made for small entities and still protect veterans and the 
interests of the Government. The final rule does not include 
performance standards because we believe there is no means to ensure 
compliance without design standards. Further, we believe there is no 
good reason for any lender to act contrary to the final rule.
    The Catalog of Federal Domestic Assistance Program number is 
64.114.

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing, Indians, Individuals with 
disabilities, Loan programs-housing and community development, Loan 
programs-Indians, Loan programs-veterans, Manufactured homes, Mortgage 
insurance, Reporting and recordkeeping requirements, Veterans.

    Approved: March 25, 1999.
Togo D. West, Jr.,
Secretary of Veterans Affairs.
    For the reasons set out in the preamble, 38 CFR part 36 is amended 
as set forth below.

PART 36--LOAN GUARANTY

    1. The authority citation for part 36 continues to read as follows:

    Authority: 38 U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 
3720, 3729, 3762, unless otherwise noted.

    2. In Sec. 36.4306a, paragraphs (a)(3) through (a)(5) are revised, 
paragraphs (a)(6) and (a)(7) are added, and a parenthetical is added to 
the end of the section, to read as follows:


Sec. 36.4306a  Interest rate reduction refinancing loan.

    (a) * * *
    (3) The monthly principal and interest payment on the new loan must 
be lower than the payment on the loan being refinanced, except when the 
term of the new loan is shorter than the term of the loan being 
refinanced; or the new loan is a fixed-rate loan that refinances a VA-
guaranteed adjustable rate mortgage; or the increase in the monthly 
payments on the loan results from the inclusion of energy efficient 
improvements, as provided by Sec. 36.4336(a)(4); or the Secretary 
approves the loan in advance after determining that the new loan is 
necessary to prevent imminent foreclosure and the veteran qualifies for 
the new loan under the credit standards contained in Sec. 36.4337.
    (4) The amount of the refinancing loan may not exceed:
    (i) An amount equal to the balance of the loan being refinanced, 
which must not be delinquent, except in cases described in paragraph 
(a)(5) of this section, and such closing costs as authorized by 
Sec. 36.4312(d) and a discount not to exceed 2 percent of the loan 
amount; or
    (ii) In the case of a loan to refinance an existing VA-guaranteed 
or direct loan and to improve the dwelling securing such loan through 
energy efficient improvements, the amount referred to with respect to 
the loan under paragraph (a)(4)(i) of this section, plus the amount 
authorized by Sec. 36.4336(a)(4).

(Authority: 38 U.S.C. 3703, 3710)

    (5) If the loan being refinanced is delinquent (delinquent means 
that a scheduled monthly payment of principal and interest is more than 
30 days past due), the new loan will be guaranteed only if the 
Secretary approves it in advance after determining that the borrower, 
through the lender, has provided reasons for the loan deficiency, has 
provided information to establish that the cause of the delinquency has 
been corrected, and qualifies for the loan under the credit standards 
contained in Sec. 36.4337. In such cases, the term ``balance of the 
loan being refinanced'' shall include any past due installments, plus 
allowable late charges.
    (6) The dollar amount of guaranty on the 38 U.S.C. 3710(a)(8) or 
(a)(9)(B)(i) loan may not exceed the original dollar amount of guaranty 
applicable to the loan being refinanced, less any dollar amount of 
guaranty previously paid as a claim on the loan being refinanced; and
    (7) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not 
exceed the original term of the loan being refinanced plus ten years, 
or the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever 
is less. For manufactured home loans that were previously guaranteed 
under 38 U.S.C. 3712, the loan term, if being refinanced under 38 
U.S.C. 3710(a)(9)(B)(i), may exceed the original term of the loan but 
may not exceed the maximum loan term allowed under 38 U.S.C. 
3703(d)(1).

(Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1))
 * * * * *
(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0601)

    3. In Sec. 36.4337, paragraph (a) is revised to read as follows:


Sec. 36.4337  Underwriting standards, processing procedures, lender 
responsibility and lender certification.

    (a) Use of standards. The standards contained in paragraphs (c) 
through (j) of this section will be used to determine whether the 
veteran's present and anticipated income and expenses, and credit 
history are satisfactory. These standards do not apply to loans 
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the 
Secretary is required to approve the loan in advance under 
Sec. 36.4306a.

(Authority: 38 U.S.C. 3703, 3710)
* * * * *
[FR Doc. 99-10146 Filed 4-22-99; 8:45 am]
BILLING CODE 8320-01-P